The Good and Bad of Romney's Energy Plan (From One of His Favorite Experts)

Last week, Mitt Romney released a plan to reach North American energy independence by 2020 -- a possibility many believe is now plausible thanks to our booming natural gas and oil production. The platform involves opening up our coasts to more deep water oil exploration, handing over more control over leasing federal lands to the states, and approving the controversial Keystone XL pipeline, among other initiatives.

There are plenty of reasons to be skeptical that we can ever actually drill our way to energy independence. But to get an expert take on the plan from someone who isn't skeptical, I called Citi's Edward Morse, whose own recent work seems to have influenced much of Romney's proposal. His March study, "Energy 2020: North America, The New Middle East?" is cited six times in the campaign's white paper, including the projection that more domestic energy production could create up to 3.6 million new jobs.

Morse had mixed feelings about Romney's energy agenda, which he called a "significant step," but also "incomplete." This is a transcript of our discussion, edited for length and clarity.

So what do you think of Romney's plan overall?

I think whether or not the staff in the Romney campaign did a lot of homework on it, they basically have the thrust of an unfolding reality right. And I think what's unfolding makes an enormous difference to the country and will make an enormous difference no matter who the president is. When you have this much natural gas and oil being produced in the country, it just changes the reality on the ground, and changes the constraints and possibilities that are being confronted.

So I think they have the basic story absolutely correct. I think they clearly chose, for political reasons, to ignore some of the constraints on boosting hydrocarbon production. They do not take a studied look at environmental factors. Nor do they look at the price that's required to keep this going. I think that one of the most misunderstood aspects of the "shale gale," as people call it, which is not just shale, but it's oil sands from Canada, and is also deep water in the U.S. Gulf of Mexico, is that it does require a price somewhere between $50 and $65 a barrel to make it economical.

What do you think are the best aspects of the plan?

You said the energy boom will happen regardless of who's president. But could regulations slow it down?

I think we addressed -- in this ungodly long study -- I think we addressed California's issues. So you know, it's probably the case that the resource base of California is as big as the resource base of Pennsylvania, Ohio, or North Dakota. Maybe not Texas, but it's pretty big. And the major constraint is not federal regulation, but state regulation. But that speaks to two issues. One is that regulation can be a major impediment, for better or worse. Some regulation, when it's based on best practices, is for better. Other regulation may be more politically engendered, as the wholesale ban in NY State on fracking appears to be politically engendered. But there are significant regulatory issues that need to be taken seriously. I think the fact that a drilling ban accompanied the Macondo disaster speaks to that. And nobody is God and can say there won't be another similar episode. I certainly am not going to predict that we won't have another drilling ban. But a big environmental problem anywhere could have a serious impact no matter who the regulator is. But let me just finish this thought. The fact that I've mentioned both California and New York is an indication that it's not necessarily an issue of whether the federal government is the regulator, but rather what the nature of the regulations are.

Are there any federal regulations currently in the pipeline that could halt the energy boom?

Since a number of the issues being confronted are under investigation, and we don't know what regulations may emerge from them, including Clean Water Act-related potential EPA regulations, I don't know how to answer that.

What would handing the states more responsibility over federal lands accomplish?

The thing that's incomprehensible -- I really mean we don't know enough from the Romney plan -- is that the Macondo disaster exposed a fact that the same agency within the Department of the Interior, the Mineral Mining Service, acted as lessor of land, acted as revenue collector, and acted as safety regulator. And the new regulations have separated those three areas of jurisdiction to make sure that there was no conflict of interest that would block one of these functions from being fulfilled at the expense of others. One of the things that I don't understand about moving things from federal to state jurisdiction is the degree to which those three areas of activity -- revenue collection, land leasing and mineral rights leasing, and safety regulations -- are adequately managed at a state level. And there's nothing apparent to me that a state could do this better than the federal government.

The Romney plan looks at the lead time on federal lands vs. the average lead time on state land. [Editor's note: Romney argues that it takes significantly longer to get drilling permits approved by the federal government than the states] But what that doesn't tell you is how complex the federal lands issues might be. And let me give you two examples. Federal lands include all deep water. There's no deep water in any state territory. Any kind of planning for deep water is bound to have more planning associated with it, so it's going to be a longer process than anything on land, or in shallow water, which includes the shallow waters of Texas and Louisiana. Just ipso facto, I don't really understand what the comparison is talking about. The second area is the collection of revenues for minerals exploitation. This is one of the single most important sources of revenue for the federal government. How readily should the federal government devolve that to the state level and how much less revenue is going to be associated with it? And is this something that ought to be considered a tradeoff in this moment in time?

Can you talk more about the constraints on oil and gas production that Romney ignores?

The hydrocarbon resource base is really phenomenal. On the other hand, there are significant numbers of tradeoffs in our political system that have been there for well over a century and are unlikely to go away any time soon.

Romney made a big deal about how he would not block the Keystone XL pipeline from bringing Canadian dirty crude into the U.S. Well, there are a couple complications on that. One is that probably the biggest opposition to it comes from within the state of Nebraska, because of the impact people believe it might have on the potential damage to the largest aquifer in North America. Now, there's an irony there. If the state of Nebraska had to do the approval, they wouldn't.

There are tradeoffs. And we may have different preferences as citizens. There are a whole bunch of people who believe the U.S. ought to aim for relative self sufficiency in hydrocarbons, but not export them, because that's a dirty process and it adds to environmental emissions that people don't like. The reason there is a trade off is there are people across the country with very different value systems. And dealing with those tradeoffs are something that no president can supercede very easily.

We can approach energy independence by making more or by using less, and your own forecast assumes that we'll use less oil in the future. Is it a weakness of Romney's plan that he focuses on production over conservation?

He doesn't talk about it, so it's hard to know. If the objective is to enhance American energy security through a form of energy independence, it's almost certainly the case that supply measures alone won't get you there. You also have to take action on the demand side, from a public policy perspective. We tried to base our case on a modest reduction in demand of about a million barrels a day between the end of 2011 and 2020.

Do you think we'll be using less oil in future regardless of what the government does? Is there natural momentum behind that shift?

Yes, there is. A lot of it is fuel efficiency. But much more of it is demographic. There are two big demographic trends underway. One is the movement of the baby boom generation into an age category of 55 and older, which has two features to it that are different from people who are under 55. One is that there are fewer cars per household. And the other is fewer vehicle miles traveled per year. Those are pretty big demographic factors that weigh heavily. The other is people your age -- not that I know what your age is, but I suspect I do -- have become much more urban than previous generations. The fact is that people between 20 and 35 are marrying less, having fewer children, are more urban, own fewer cars, and drive fewer miles.

Another thing I thought was interesting about your study was the large boost we get from expanded offshore drilling. All of that comes from the Gulf. It's not as if you're saying we'll have to drill off the shores of Virginia to get that increase in production.

When we tried to look at what was possible -- we tried to do this without constraints, but clearly we did not have in what we were doing anything related to east coast or west coast lifting the ban, but just continued drilling opportunities in areas that were currently well within the limits.

Lifting that coastal drilling ban is a big plank of Romney's plan. What would that do for U.S. oil production?

Well we can't say for sure. But we can say for sure it won't happen in the next decade, because there have been no seismic studies. There's been no effort to delineate anything. It's close to zero impact between now and 2020.

Is there anything that the Obama administration is doing right now that's really getting in the way of increased oil and gas production?

No.

What about the impact of the post-BP spill drilling ban?

Production has not picked back up. Drilling has picked up. But production is still sliding. Because when you have no enhanced recovery, no drilling of any sort for two years, decline rates set in. Decline rates have slowed down, but they're still on a negative path. They'll probably flatten by the end of the year and go up next year. We're producing half a million barrels in the Gulf of Mexico today than we would have been had Macondo taken place. And that's through a combination of new production on the one hand and lower decline on the other hand.

But aside from what happened after Macondo, there's nothing the Obama administration is doing to get in the way of oil and gas production?

I think technically there may be slight impediments due to the initial vetoing of the Keystone XL pipeline. But in general, take-away capacity has been lagging production growth. And there's been a remarkable increase in rail transportation, for better or worse, because it gives a lot of emissions. Rail transportation of oil is up about 340,000, 350,000 barrels a day year on year. It's well over a million barrels a day now. [Editor's Note: Keystone XL is designed to transport roughly 700,000 barrels of tar sands oil a day from Canada towards refineries in the Gulf].

You seemed to doubt that parts of Romney's plan would really have much of an impact. But do you think that overall it would speed up oil and gas production?

The plan is orchestrated to raise the pace of growth of oil production, and I think it does.

What about concrete steps? Is there anything in it that really stands out to you as a good particular policy that will help us get more oil and gas out of the ground?

Let me be very general about it. I think that setting expectations is a significant part of public policy. If the expectation being set is that more lands are going to be set aside for mineral exploitation, I think that has an important impact on expectations on future production and future prices. I think that, from that perspective, it's a positive step.

So the way you see the plan is, in general, it's great for setting the terms of the debate. And if there were a Romney presidency, it would be good for setting the expectations of developers. That said, there are specific aspects that he promotes that seem outright irrelevant to you, such as opening up the coasts or giving responsibilities to the states.

I would say it's incomplete and it's imperfect in that regard

I think this is a significant step forward that a major political
candidate in a major country has pushed this issue, and I think people
ought to welcome the debate that unfolds on the meaning of energy
independence. What can be achieved through energy self sufficiency,
where it might be disappointing, but where it can be extremely helpful
to the economy as a whole. He looked at employment issues, he looked at
balance of payment issues, he looked at dollar related issues versus
other currencies. And I think those are critically important elements of
any sophisticated discussion about energy self-sufficiency or
independence.

So the best thing about this plan is that it sets the terms of the debate by saying: "Here are the benefits from drilling more."